A slap for India's IT, a sop for
short-selling By Indrajit Basu
KOLKATA - India's money-spinning
information-technology (IT) sector, which
catapulted the country into the global arena and
which is a significant export earner, with
revenues of more than US$30 billion a year, is
digesting the news that it will have to pay taxes
for the first time in its 15-year history.
All software and business process
outsourcing companies will have to pay a tax of
11.33% for the financial year 2007-08, Finance
Minister Palaniappan Chidambaram announced in his
budget
on Wednesday.
"This has come as a big
surprise," said S Ramadorai, chief executive
officer of India's largest IT company, Tata
Consultancy Services (TCS).
According to
IT analysts, the tax may not hurt the big IT
players - such as Infosys, TCS and Wipro - too
much. "Its impact will be 1.5-2.5% of our
margins," said V Balagopal, chief financial
officer of Infosys.
Ashank Desai of Mastek
commented, "More than the big companies, it will
be the smaller companies that will be adversely
impacted. The larger companies already pay taxes
in the range of 15-16% in the countries they serve
[such as in North America and Europe] with which
India already has double-taxation treaties, but in
the Indian IT industry close to 90% of the
companies have revenues of less than Rs50 crores
[about US$12 million] and such companies will be
worst hit."
Foreign institutional
investors are expected to be pleased that they
will now be allowed to short-sell shares - the
selling of shares without owning them first but
picking them up from the market as prices fall.
This forced the use of participatory notes (PNs -
contract notes issued by foreign institutional
investors to clients based outside India). This
new freedom will help curb the use of PNs, which
the government does not like (see India grapples with terrorist
bulls, Asia Times Online, February 21).
This year's budget contained no big-ticket
reforms and lacked measures needed to enable the
economy, which has just started to sprint,
maintain its pace of growth.
The budget
ruffled stock investors. The combination of the
first-ever tax on IT companies and a higher (from
12.5% to 15%) proposed tax on the distribution of
dividends by companies and mutual funds triggered
across-the-board selling on Wednesday, resulting
in a 545-point fall in the Sensex, the benchmark
index of the Bombay Stock Exchange - the biggest
single-day fall in eight months.
Although
external factors such as the tanking of the Asian
markets led by China and conflicting growth
reports of the US economy were partly its cause,
"The budget was a letdown," said Nirmal Jain, a
Mumbai-based stockbroker. "It not only has
retrograde steps, it also has nothing to look
forward to."
One could argue that a
country's budget is not just meant for its stock
markets, industry, and those who crunch numbers;
"There are other imperatives as well, like health
care and education," said Govinda Rao, director of
the National Institute of Public Finance and
Policy, issues that the budget has addressed this
year.
But according to N R Narayana Murthy
of Infosys, India's poster-boy IT company, "The
budget has missed a great opportunity to transform
the economy, which [opportunities] come few and
far between in the life of a nation. With its
economy growing at 9%, the country needed bold
structural transformational moves changing the
course of the economy of this country. [But] the
budget, which set out to meet very many
objectives, had incremental [measures], but not
transformational [ones]."
Nevertheless,
sticking to Chidambaram's belief that "everything
else can wait but not agriculture", the budget
doled out an array of sops to the farming sector
to kick-start its stagnating (below 3% a year)
growth. Gainers also are senior citizens (over 60
years old) and the health-care,
scientific-research and education sectors in the
form of generous handouts that experts feel augur
well for the economy in the long run.
The
budget also reduced import and local duties for
important industries such as pharmaceuticals,
synthetic fibers, edible oils and aviation, which,
according to Business Week magazine, "opens up the
Indian economy to further competition". Experts
are also pleased that Chidambaram has been able to
contain the country's deficit to the level
promised in the previous budget.
Overall,
with a general election next year, the finance
minister was expected to play safe. Thus big-bang
issues such as pension reforms and a more liberal
policy on foreign direct investment in retail were
left aside.
Overall, Chidambaram has not
done any harm. Given the political pressures his
government faces from its allies on the left, as
well as the election, he could have gone for
populist measures. Instead, as Chidambaram said,
"I have decided to bet on India's growth, and even
if industry's captains do not have confidence in
the future of India, I do."
Indrajit
Basu is a Kolkata-based journalist.
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